A Continuous Securities Offering (CSO) is a new investment vehicle, updated for the digital era. The CSO enables companies with growth potential to raise funding by selling a claim on a reserve, funded primarily by a fixed portion of revenues. The CSO offers several advantages over traditional financing:
Get financing while retaining their ownership stake
Get better liquidity
Get a way to participate in the company’s financial success
Fairmint offers a turnkey solution that streamlines companies’ ability to launch and manage their own CSO. This document explains the market shortcomings that the CSO solves and provides an overview of how a CSO works, including the lifecycle and parameters for trading.
The information provided in this handbook pertaining to Fairmint Inc. ("Fairmint" or the "Company"), digital securities (the "Securities"), its business assets, strategy and operations is for general informational purposes only and is not a formal offer to sell or a solicitation of an offer to buy any Securities, tokens, options, futures, or other derivatives related to securities in any jurisdiction, and its content is not prescribed by securities laws. Information contained in this handbook should not be relied upon as advice to buy or sell or hold Securities or securities or as an offer to sell Securities. This presentation does not take into account nor does it provide any tax, legal or investment advice or opinion regarding the specific investment objectives or financial situation of any person. While the information in this handbook is believed to be accurate and reliable, Fairmint and its agents, advisors, directors, officers, employees and shareholders make no representation or warranties, expressed or implied, as to the accuracy of such information and Fairmint expressly disclaims any and all liability that may be based on such information or errors or omissions thereof. Fairmint reserves the right to amend or replace the information contained herein, in part or entirely, at any time, and undertakes no obligation to provide the recipient with access to the amended information or to notify the recipient thereof.
Neither Fairmint nor any of Fairmint’s representatives shall have any liability whatsoever, under contract, tort, trust or otherwise, to you or any person resulting from the use of the information in this handbook by you or any of your representatives or for omissions from the information in this presentation. Additionally, Fairmint undertakes no obligation to comment on the expectations of, or statements made by, third parties in respect of the matters discussed in this handbook.
This handbook contains forward looking statements, including among other things, statements concerning the distribution of hypothetical Securities, the theoretical performance of securities in connection with the Company’s proposed securities offering model, and other statements identified by words such as "could," "expects," "intends," "may," "plans," "potential," "should," "will," "would," or similar expressions and the negatives of those terms. They may also include hypothetical scenarios illustrating concepts discussed herein. In any event, forward-looking statements are not promises or guarantees of future performance, and are subject to a variety of risks and uncertainties, many of which are beyond our control. Actual results could differ materially from those anticipated in such forward-looking statements as a result of various risks and uncertainties, which include, without limitation, market risks and uncertainties and the satisfaction of losing conditions for a distribution of Securities. Forward-looking statements speak only as of the date hereof, and, except as required by law, Fairmint undertakes no obligation to update or revise these forward-looking statements.
A Continuous Securities Offering (CSO) is a new, updated way for companies to raise funding. The CSO democratizes investing and modernizes it for the digital era. It expands the pool of potential investors, allowing all stakeholders — not just a small group of privileged, wealthy investors — to share in the value created by a company’s success.
Consider this: although AirBnB’s 650,000 hosts are critical to its success, most of the $35 billion in value created by the company will flow to a small number of investors. The CSO was designed to disrupt this model and balance the playing field.
Company Value Captured
* These diagrams are not basedon real data and for illustrations purposes only
Company Value Captured
Fairmint provides a turnkey cloud-based web application that enables companies to raise funding through a CSO with confidence and minimal effort. Using Fairmint technology, a company can easily run a CSO on its own website or app, raising capital and letting investors trade in securities backed by a portion of the company’s revenues. Fairmint’s goal is to disrupt the investment banking industry by providing companies with financing solutions that are fairer and easier to manage.
We developed the CSO model in response to widespread recognition that current investing options are inadequate. To craft a better solution, we interviewed hundreds of people at growth-oriented companies, including founders, investors, employees and marketplace suppliers (such as AirBnB hosts and Uber drivers). Our model gives each stakeholder what they want most:
Founders get financing without sacrificing ownership of the company. They also get a vehicle to align the company’s wellbeing with their stakeholders and customers.
Investors get liquidity, so that they can buy and sell whenever they want within the boundaries set by securities law in the applicable jurisdictions.
Stakeholders — such as employees and platform users — get access to a security that lets them participate financially in the company’s growth.
To ensure that the CSO idea and the Fairmint technology are robust, we have conducted extensive research with leading firms. Our legal work was performed by top-tier technology law firms specializing in securities law serving premium startups and emerging growth companies. To develop a sound and transparent tax and accounting framework, we have worked with a “Big Four” auditing firm. We have subjected the CSO model to comprehensive economic proofs, conducted by BlockScience, an engineering, R&D, and analytics firm specializing in complex systems. Lastly, the technology behind our solutions has been reviewed and audited extensively by Consensys Diligence, one of the most reputable auditing firms in our specialized field.
This document provides an overview of how CSOs work and how they improve on the current system of financing.
It’s not groundbreaking news that technologies developed over the past quarter century have dramatically reshaped how businesses operate and how they interact with customers. These technologies — ranging from the internet and smartphone apps to cloud computing and blockchain — have enabled new business models, such as peer-to-peer lending (Lending Club and Prosper) and sharing-economy platforms (AirBnB and Lyft).
As these models have evolved, high profile investors have lamented the growing inadequacies of the investment vehicles that have underpinned the economy since the industrial revolution. While these vehicles have undoubtedly helped drive centuries of growth and innovation, they tend to serve the interests of a privileged few — wealthy shareholders over stakeholders, for instance.
He has a point. Uber’s IPO, for instance, earned billions for a limited number of people, including investors such as Google, SoftBank, along with Uber’s co-founders and executives such as Ryan Graves, the company’s first CEO. The ride-hailing service’s drivers — the stakeholders Uber depends upon — were left out altogether. The same holds true for Lyft, Lending Club, and many others.
The fact is, these companies may have wanted to reward or incentivize their stakeholders by offering a stake in their future success. But there currently exists no vehicle for them to do so. Pre-IPO companies frequently sell shares to their employees as a retention perk, but securities regulations prevent them from offering shares to many outside stakeholders. By the time a company launches its initial public stock offerings (IPO), it’s too late for these early stakeholders — who frequently believed in the company enough to alter their careers and make investments (cars, apartments) — to cash in on the substantial value that they helped create in the high growth stages of development.
Moreover, even IPOs are increasingly out of the reach of stakeholders. Companies are waiting longer to go public, and many more are choosing to remain private, largely due to the growing administrative and regulatory burden. There are about half as many public companies today (3,671) as in 1996 (7,322). If a company doesn’t go public, sell itself or distribute dividends, its financial value remains perpetually in the hands of a few. Stakeholders never get their fair share.
When you can invest as a business angel Without CSO
When you can invest as a business angel With CSO
* These diagrams are not based on real data on for illustrations purposes only
In the current environment, even traditional business angels (BA) are being sidelined from startup opportunities. These days, BAs need to be highly connected insiders, dedicating themselves full-time to investing in order to make a profit. Once a company starts taking off, the BAs money is no longer welcome; their only opportunity to invest is to hope the company eventually goes public. A CSO enables the BA to invest in promising private companies, from the earliest stages onward.
These limitations posed by traditional funding vehicles are unfortunate not only for the stakeholders, but also for founders, who are forced to fight for financing among a relatively small group of individuals who control large quantities of wealth. Because the pool of early-stage investors is small, founders must make significant concessions — such as offering control and large ownership stakes — to access financing. These early-stage financiers tend to have narrow interests (e.g. maximizing return), so many companies remain unfunded despite serving worthwhile needs or even being potentially profitable.
Fairmint addresses these inequities by offering tools enabling any investor — not just the privileged few — to purchase a stake from the earliest stages of a company’s development through the IPO. Instead of preventing investors from getting a seat at a capitalization table (the “cap table”) limited by ownership stakes, we have created a new table, a “fair table” that allows a broader group of stakeholders the opportunity to get exposure to the company’s financial success.
The CSO provides an investment vehicle that is transparent and defined by clear rules, a vehicle that doesn’t require the company to pay excessive professional-service fees or take on the kind of administrative burden that typically accompanies fundraising. Moreover, by decoupling ownership from financing, the CSO leaves governance in the hands of founders and their companies. This allows them to focus on the long term success of their companies.
The reserve's primary purpose is to serve as a last-resort buyer for the securities. The reserve continuously offers a price, calculated by an algorithm, at which investors can redeem securities. As the reserve grows, investors participate in the company’s success.
The company can increase the portion of its revenues that it commits to the reserve — for instance, to attract additional capital from investors — but it can never decrease that portion. Investors and other stakeholders (such as potential service providers) can acquire CSO securities either by purchasing them or through compliant incentive programs the company establishes.
* This graph is for illustrative purpose only, it is not based on real data
If investors believe that the company’s revenues (and therefore the reserve) will grow, they may be likely to buy securities at a price that is a multiple of the value of the current redemption price. This is roughly analogous to traditional equity markets, in which investors buy shares at a multiple to a company’s expected future earnings (known as the price-earnings ratio).
CSO securities offer another key advantage over traditional equity shares: because they represent a claim on the reserve, there is a theoretical floor beneath the security’s value, established by the balance in the reserve fund. So if a company goes bankrupt, investors can still expect to receive some compensation for their securities, based on the balance in the reserve. However, the level of compensation will depend on the timing of the redemption relative to other investors: redeeming securitiess removes them from circulation, and the redemption price decreases as the number of securities outstanding decreases, so investors who sell first will do so at a higher price. Amid significant selling pressure, investors may see a significant reduction in the value of their securities. In this sense, the reserve does not represent a remedy that will make investors whole in an extreme downside scenario, but we believe it will still result in investors receiving more protection than they otherwise would in a traditional equity market, particularly if they are retail investors who lack the size and influence of institutional investors who can often secure more favorable protections in these downside scenarios. (See Pricing and Trading Securities for details.)
There’s no need for the company to hire investment bankers, develop a prospectus that few investors will review, or in many jurisdictions, publicly file with regulatory agencies, although we believe that, as laws evolve with respect to decentralized technology, the CSO model may ultimately be attractive to certain public companies. It is, therefore, appropriate for a wide array of companies, ranging from Silicon Valley companies suitable for venture capital to dynamic small or medium-size businesses. This would include many promising ventures that are not a good fit for traditional funding. As discussed further below, offering a CSO is compatible with venture capital, an initial public offering (IPO) or other more traditional sources of capital.
Embedded in the CSO model are various investor protections. For instance, the company must follow best practices to account for its revenues — although in the case of companies that use digital platforms (such as Stripe), revenues can be reported in real time, simplifying the process. As a securities offering, investors should also enjoy the protections of their jurisdictions securities laws, including fraud and anti-manipulation protections. Additionally, because the company raises money over time rather than in a one-off manner, the incentive is to continue executing well to cultivate the trust of investors. Finally, investors benefit from downside protection thanks to the reserve, which acts as a buyer of last resort.
Several features of the CSO are designed to align the investor’s interests with the company’s. One is the pricing model. The model contemplates the security price rising with the number of securities outstanding. This means that investor enthusiasm helps the company raise more capital, given that the company receives capital for each newly minted security. This capital, in turn, helps investors by enabling the company to invest and grow, creating a virtuous circle.
Likewise, the CSO enables the company to dedicate a certain percentage of the proceeds from newly minted securities — say 10% — to the reserve fund. This “investor contribution” becomes the property of the security holders, alongside the revenues committed by the company. As such, a high level of buying can marginally increase the reserve value, helping provide price stability independent of the company’s revenue contribution.
It should be noted that some companies — particularly large ones with substantial profits — may choose not to commit any portion of the proceeds from newly minted securities to the reserve (in other words, to set the investor contribution to zero). In other instances, applicable law may prohibit such arrangements. Founders may determine that investors don’t need this incentive, or that both the company and its investors would be better off if the company were able to use 100% of the purchase proceeds to finance growth.
The remaining proceeds from newly minted securities goes into the company’s treasury. This money is used as financing, much the way a venture capital investment finances growth. The company is therefore leveraging its future revenues, rather than selling an ownership stake. It is obtaining financing from the new securities that investors mint, and in return it is granting the investors a claim on the value committed to the reserve during the life of the CSO.
Note that while the company commits to a minimum time period for the CSO, it is always free to extend the duration of the CSO, for a fixed period. In doing so, it would continue funding the reserve with the same portion of its revenues, further expanding the potential returns for investors.
It may also be in the interest of the company (and its investors) to raise funding through other sources, including venture capital, an IPO or other types of equity investment. Alternatively, a company may have already received funding from such equity sources before considering a CSO.
The good news is that such equity investments are compatible with CSOs and both forms of funding could occur in parallel. Because the CSO investor owns a claim on the reserve rather than an ownership stake in the company, the startup founders and equity investors retain control of the company. This means a company can issue a CSO even if it already has equity investors, without diluting their stake in the company, provided its board and stockholders consent. A public company may benefit from a CSO as a more flexible way to raise funds and incentivize stakeholders. Further, a company is also free to raise funding through other channels after it launches its CSO.
Of course, each company’s management and stockholders will decide whether a CSO is beneficial for the company. We believe that, just as in the case where stockholders approve a board’s decision to take non-dilutive financing (such as venture debt), stockholders may also see a benefit to taking non-dilutive financing in the form of a CSO. In addition, other than limitations imposed by law, nothing precludes stockholders from also participating in a CSO or a company allocating securities from a CSO to its stockholders, provided this is properly disclosed to all active participants.
The CSO has three stages to its lifecycle: initialization, running and closing.
The initialization stage features important protections for both the company and prospective investors. In the initialization stage, investors can purchase securities at the same average price until the minimum funding threshold is reached. There is no time limitation to the initialization stage. Until the minimum funding threshold is reached, the company has the right to cancel the CSO at any time. If the company decides to cancel the CSO, investors recover their entire investment. Similarly, investors have the right to obtain a full refund of their investment at any time during initialization. Once the threshold is reached, the CSO automatically moves into the running stage.
These provisions protect both founders and investors. They ensure that investors don’t get stuck investing in a company that few other investors believe in. Further, they ensure that the company does not end up with too little investment interest, thereby raising insufficient funding or potentially selling their CSO reserve at a discount. The minimum funding threshold establishes a floor above which the company is comfortable moving ahead with its CSO. A company with $10 million in revenues that commits 10% to its CSO reserve, for instance, may choose a minimum funding threshold of $1 million to enable it to gauge investor interest in the CSO.
The CSO enters the running stage automatically once the minimum funding goal is reached. In the running stage, investors can mint and redeem securities until the company chooses to enter the closing stage. The running stage lasts at least until the minimum duration has been reached, although the company always has the option to continue the CSO. The company must continue funding the reserve as long as the CSO is in the running stage. It cannot reduce the duration or the portion of revenues it commits to the reserve.
When the CSO offering’s minimum duration arrives, the company has two options:
In the closing stage, the company is responsible for redeeming all outstanding securities at the price paid for the final security minted. It uses the cash in the reserve to do this, but it is likely that it will need to add additional funds to the reserve in order to fully redeem all securities held by investors.
Therefore, to enter the closing stage, the company must first pay an exit fee to the reserve, equal to the final CSO security minting price multiplied by the number of securities in circulation, minus the balance in the reserve. Once the exit fee has been paid to the reserve, investors are free to redeem their securities and the company no longer needs to commit revenues to the reserve.
Investors may speculate on when the company will close its CSO. In general they are likely to assume that the CSO will be closed after the minimum duration has expired. If so, the incentive to invest diminishes as the deadline approaches, given that the company would have fewer reserve contributions remaining.
Companies are unlikely to telegraph the closure in advance, to avoid creating a situation where frontrunning or other manipulation may occur. Because the company is never required to close the CSO, if the cost of capital provided by the CSO is satisfying, then the company can simply continue its CSO indefinitely.
Once the parameters are settled and the technology is set up, the company embeds an “invest now” link on its website and launches its CSO. The process is automated, so there is minimal administration, but it is important to stress that the company manages its own CSO (using Fairmint’s technology) on its own cloud. While Fairmint may explore other models in the future, Fairmint does not presently provide any broker-dealer services and is solely a technology provider at this time.
Although the company is legally and financially responsible for the CSO, Fairmint’s application enables the company to set parameters to comply with relevant legal and contractual provisions. It can also integrate with other service providers’ technology to help the issuer enforce various potential provisions, such as lockup periods, investor credential requirements and permissible trading windows for insiders. The jurisdiction where the issuer is headquartered and where its investors are located will determine which rules should be enforced when issuing a CSO. Although the financial product issued via a CSO will often be deemed a security under US securities law, it may be considered a different kind of asset in other global jurisdictions. We emphasize that Fairmint offers no legal advice; issuers should seek their own legal advice when launching a CSO.
To review, in a CSO a company commits to setting aside a fixed portion of its revenues to fund a reserve. Investors capitalize on the growth of this reserve by trading or holding tokens, which provide a claim on the reserve. Token holders can also earn fees by providing their tokens to a liquidy pool, once any legal lockup period has expired. This section offers an overview on how these transactions work.
There are four ways to trade tokens. They can be:
from the reserve
at a market price
at a market price
in exchange for cash from the reserve
Buying and selling occur using Uniswap, an external “decentralized automated market maker.” Uniswap’s protocol enables the pooling of liquidity for a specific digital asset according to a deterministic pricing algorithm stemming from the liquidity supply. While the transactions occur via Uniswap’s protocol, the Fairmint web application interfaces with Uniswap to provide a seamless experience directly from the issuer's website or app.
The Fairmint solution routes orders to whichever market offers the investor the best price for the desired trade. If the investor seeks to acquire tokens, the application routes the order to whichever option — minting and/or buying — is in the investor’s financial interest. Likewise, for an investor liquidating tokens, the application routes the order either to sell and/or to redeem the tokens, whichever delivers a better return for the investor. The application features a user interface that automatically facilitates all transactions, making the CSO easy to use for the company and its investors.
Minting securities — meaning purchasing them directly from the reserve — creates new securities, adding to the total number of securities outstanding. New securities are minted when investors want to buy more securities than there is supply — typically, when optimism about the company’s future revenues rises. (In some jurisdictions, such as the US, there may be restrictions, based on income or net worth, that could prevent investors from minting securities.)
The price of minting a security is directly proportional to the number of securities outstanding. As this quantity increases, the price for minting each additional security gradually rises. The price for minting the 1,000th security will be slightly less expensive than 1,001st, and so on.
This pricing model rewards investors who are early believers in the company and helps build momentum for the company’s CSO. It also rewards a company that investors believe in: the more securities investors purchase the more capital the company receives, creating a virtuous circle that aligns investor and company interests.
When the reserve mints new securities, the company receives a portion of the proceeds (e.g. 90%) to finance its development. The remainder goes to boost the value of the reserve, thereby benefiting investors. The company establishes these proportions in advance of launching the CSO. The portion that goes to the reserve — called the investor contribution — is typically a low number, such as 10%. It can be set to 0% as well, typically for a very strong and profitable company, where investor risk is minimal; this would mean that all of the proceeds from security creation would go to the company.
As described below, some security holders may choose to make securities available as liquidity on the Uniswap automated market (see Allocating Liquidity). Investors can then buy (or sell) securities on this market. You can reasonably expect the automated-market buy price to range between the redemption price and the minting price. In jurisdictions with certain investment restrictions, there may be excess buying demand on the automated market from investors excluded from minting securities. This may drive the buy price above the minting price, if investors are optimistic.
You may also sell on the automated market. When selling, it’s important to note that you can also liquidate securities by “redeeming” them, described in the next section. As noted above, the Fairmint technology routes the liquidation to whichever method — selling or redeeming — provides you with the highest possible return available at the time of the transaction. In the vast majority of cases, selling will be preferable to redeeming.
In contrast to traditional equity investments, where shares can become worthless, there is virtually always some value to a security given that it is a fractional claim on a funded reserve. Unlike the minting price (which is directly proportional to the number of securities outstanding), the redemption price changes frequently. It is calculated by an algorithm, based on the cash in the reserve and the number of outstanding securities in circulation. The higher the reserve balance per security, the greater the redemption price.
The reserve balance is affected by several factors. It increases from the investor contribution when new securities are minted. It also increases when the company deposits revenues in the reserve. The company does this by minting new securities, with all of the proceeds going to the reserve; in addition to funding the reserve, this boosts the security price, as it increases the number of securities outstanding. It also increases the number of securities held by the company, which can choose to hold them, use them to drive an incentive program for stakeholders, or to reward investors by “retiring” them.
Retiring securities is analogous to a listed company buying back shares to increase shareholder value. Retiring decreases the number of securities that have a claim on the reserve, thereby increasing the redemption price. Retiring securities does not change the number of securities outstanding, so it has no impact on the security minting price, which rises in proportion to the number of securities minted.
The reserve decreases only when investors remove funds by redeeming securities. The company can never withdraw funds from the reserve, nor can it redeem the securities it holds.
If numerous investors want to redeem their securities, those who redeem sooner will receive a higher price. The more securities investors redeem, the lower the redemption price for each subsequent security. Redeeming securities also decreases the minting price, given that redemption removes securities from circulation.
Alex is a successful (hypothetical) coder. After purchasing an Acme smart desk — which adjusts electronically to a standing or sitting desk — she has become 30 percent more productive and feels healthier at day’s end. She loves the product, and constantly tells friends about it, many of whom purchase their own smart desk.
Two years later, Acme’s growth has plateaued, and it decides to close its CSO. Because the last securities minted were valued at $41.34, Alex redeems her 95.51 ACME at the CSO closing for $3,948.38, nearly four times her initial investment, for a whopping 25.71% internal rate of return.
After five years in business, revenues for the (hypothetical) MiniClothes online marketplace were growing, but competition was intensifying. Better funded challengers were seeking to lure away MiniClothes’ previously loyal base of customers and sellers. The company needed cash to market itself and upgrade its website, so its founder, Jamie, launched a CSO, naming the security MINIC. MiniClothes takes a 15% commission on its sales — if it sells $100 in merchandise, it collects $15 — and Jamie decided to commit 3% of company revenues to the CSO.
The CSO provide much-needed capital and it boosted MiniClothes’ visibility, as the price of MINIC was posted on the many websites listing and analyzing the prices of globally available digital currencies. More importantly, MINICs have been instrumental in aligning MiniClothes’ stakeholders with its success. Not only can they purchase MINICs and share in its future revenues, but every year Jamie offers sellers who sold over $10,000 the opportunity to purchase MINICs accumulated by MiniClothes during the year at a discounted price. Since then, MiniClothes has retained all of its high-sellers and even attracted many more. In fact, the CSO transformed Jamie’s most loyal users into fierce ambassadors, boosting the growth of MiniClothes for everyone’s benefit.
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